Posted
by
Zonk
on Friday February 02, 2007 @12:58PM
from the that-certainly-would-explain-it dept.

swschrad writes "There's a story up on Reuters today saying Dell faces a class-action lawsuit for finagling the books to hide under-table money from Intel. The hidden cash, up to a quarter-billion dollars a quarter, is alleged to have been paid to keep competing CPUs out of Dell PCs. Dell, their accountants at PriceWaterhouse, company founder Michael Dell, and former CEO Kevin Rollins are all avoiding comment on the pending litigation."

Dell spent years refusing (the then better performing and equally compatible) AMD CPU's for it's various PC's... It is only recently that AMD has gotten a fair chance with Dell. I'm assuming by this article that Intel stopped paying and that's why the finally relented last year and introduced AMD based systems.

Too bad they waited that long... because in my opinion, amd was superior for a good while when they brought in the 64bit CPUs and dual cores (and before then too). Now that intel has caught up (even surpassed) AMD, Dell now offers AMD.It's almost like Intel knew their product wasn't as good as AMD, and they were willing to pay big $$ to Dell in order to prevent the social masses from accepting AMD as the better product. But now, maybe Intel knows they have the better product, so they are not bending over

Before they opened up to AMD, 6+ months ago?, Dell would only sell Intel based systems and Intel only. I think the only reason that they opened up to AMD was the demand (Intel fell behind the tech curve) and that the whole Intel deal was found out.Due to their Tech support Script monkeys (I told you I don't have Windows installed five times now...) the over all quality drop (You need a new HD for that Computer you just bought 4 months ago...) and their lackluster cookie cutter builds, (Yay I have to reinsta

It's called the PowerEdge 6950, it's a quad dual core AMD (8200 opteron series). There is also an entry level server (SC1435). I think the reason they sell the 6950 is that it runs on standard 110AC. The 4U Quad Xeon (6850) requires 220AC, which I find entertaining.:)

I don't understand why "under the table" cash is even necessary. Why do that if they can just get a discount? Do public filings even show which company is getting Dell's money? I don't think they are broken down that far.

Financial statements are public and they never include per-unit prices for raw materials and parts. They include a lump sum "Cost of Goods Sold" which includes the total price for all raw materials and parts consumed per business (if it's broken down that way). If Dell is worried that other companies can read their financial records they have more serious problems to worry about.

I don't understand why "under the table" cash is even necessary. Why do that if they can just get a discount? Do public filings even show which company is getting Dell's money? I don't think they are broken down that far.

Well, while I think such a payment should be used to reduce the cost of the components and as a result widen the profit margin (and hence the taxes paid) Dell may want to account for it differently. They could, for example, be offering copay money to advertise Intel chips; which would be a

The article is vague on details but it sounds like they are alleging that Dell recorded the Intel money as part of their revenue instead of discounting it from the COGS as they are supposed to do. I still don't see how it could inflate their profits as the suit alleges.

Actually, that's naked insider trading. It's more like "we're investing in a new company X, and we could send them your way as their systems vendor, that is, with our cash. So what about that purchasing deal we were talking about before?"

This is not "insider trading". Publicly traded companies do not have to reveal deals in progress... That would ridiculous. The only way to comply with these kinds of demands would be to have cameras following every business executive of the company and have that broadcast real life. They only have to report on deals after they are completed. Discussing a deal in progress and even making it a part of a larger deal with a 3rd party is not insider trading. It's a legitimate way of doing business.

> Publicly traded companies do not have to reveal deals in progress... That would ridiculous.

No, but you can't trade stock based on the information of deals in progress if that information is not public. That's why I suggested that the transaction would involve something other than stock. IPO's in particular have a "quiet period" that could sink the whole IPO if that sort of discussion came to light.

I was with you up until:Very similar to the concept of a government security clearance.

How do you mean? Speaking as someone who had a security clearance, it doesn't entitle you to free stock tips on the golf course, or really anything else particularly interesting. It's more just a prerequisite for employment; the biggest benefit is that it makes you look like a more attractive employee when certain companies are looking for staff.

I suspect that there are some anti-dumping laws here that are being circumvented. It's the only thing I can think of that makes it illegal to lower prices below a certain level (which is what the end-result of that transaction is).

Well, predatory pricing is a ridiculous concept and Supreme Court has made it difficult (or next to impossible) to prove for a good reason. If it's YOUR product in a free country you should be able to sell it for any amount of money YOU deem appropriate. Well, try to sell... whether you actually do sell it at that price depends on whether you'll find a buyer who agrees.

Well, predatory pricing is a ridiculous concept and Supreme Court has made it difficult (or next to impossible) to prove for a good reason. If it's YOUR product in a free country you should be able to sell it for any amount of money YOU deem appropriate. Well, try to sell... whether you actually do sell it at that price depends on whether you'll find a buyer who agrees.

Here's the not ridiculous concept: Say three small companies X, Y, and Z make comparable widgets that cost them about $100 to make and th

It's called predatory pricing... It's one of the main reasons that straight free markets don't work.

That's a pretty sweeping generalization. On paper, predatory pricing may sound like an unstoppable weapon. But in real-world economies, where there's still real money at stake, it's not as if anybody can just decide to use predatory pricing anytime they feel like and get away with it. Pricing your own products below profitability always introduces short-term risk. Usually companies that employ this tac

Ahh, nope. I suggest you do some research on anti-monopoly laws, as well as US regulations of publicly traded companies. Companies in a position of market dominance (as Intel was at one time) are not allowed to pay resellers to not use competitor products. The money was likely paid under the table to avoid investigation in re: Intel paying to keep AMD out of Dell products; the other reason for the payments being on the sly was to manipulate stock prices, which is also illegal.

From AMD's complaint about Intel's unfair business practices, emphasis mine:

Intel's conduct has unfairly and artificially capped AMD's market share, and constrained it from expanding to reach the minimum efficient levels of scale necessary to compete with Intel as a predominant supplier to major customers. As a result, computer manufacturers continue to buy most of their requirements from Intel, continue to pay monopoly prices, continue to be exposed to Intel's economic coercion, and continue to submit to artificial limits Intel places on their purchases from AMD. With AMD's opportunity to compete thus constrained, the cycle continues, and Intel's monopoly profits continue to flow.

Consumers ultimately foot this bill, in the form of inflated PC prices and the loss of freedom to purchase computer products that best fit their needs. Society is worse off for lack of innovation that only a truly competitive market can drive. The Japanese Government recognized these competitive harms when on March 8, 2005, its Fair Trade Commission (the "JFTC") recommended that Intel be sanctioned for its exclusionary misconduct directed at AMD. Intel chose not to contest the charges.

It's pretty likely, IMO, that Intel used these unfair business practices in countries other than Japan.

Let alone the reporting issues for public companies that other posters have addressed.

The monies in question is related to Intel's advertising budget; if you are a system vendor and prominently display the Intel logo in your advertising, Intel will fund a certain percentage of the advertising, based on the prominence of the logo in your advertising. (Microsoft has a similar program).

Am I right? If so, then the ones suing Dell are complaining about NOTHING. There is absolutely nothing stopping AMD from implementing such policies if they have not already d

The monies in question is related to Intel's advertising budget; if you are a system vendor and prominently display the Intel logo in your advertising, Intel will fund a certain percentage of the advertising, based on the prominence of the logo in your advertising. (Microsoft has a similar program). Am I right? If so, then the ones suing Dell are complaining about NOTHING. There is absolutely nothing stopping AMD from implementing such policies if they have not already done so.

A large technology company trying to make sure the competition stays out of the game by pushing the retailers? Preposterous! Next you'll tell me that Microsoft is trying to rule the world by forcing everyone on the planet to use their products.

So, it just might be illegal. Consider the following scenarios, none of which may be true and all of which are just speculation by me. Again, none of these may be true, but it shows how this kind of thing is more than "no big deal".1) If Dell hid this money from the IRS and failed to pay taxes on it, that would certainly be illegal.2) If Dell claimed this money under "sales" when in fact it was a gift, that might have caused their stock to be inflated by making their sales look better than the

The lawsuit accuses Dell of artificially inflating profits "by secretly receiving approximately $250 million a quarter in likely illegal rebate kickbacks payments" from Intel in return for an exclusive deal to purchase Intel's microprocessors, class-action lawyer William Lerach told Reuters.

I can see why hiding such a transaction is illegal. But why is the deal itself illegal in the first place? Why do they need to hide that? Why can't Dell make a deal with Intel to use only Intel chips in exchange for a good price if they want to?

One way in which a monopolist controls the market is with public price matching. For example, if Intel publishes all their pricing, and guarantees that anyone going exclusively Intel will not pay more than say, Dell, then if Intel drops the price to Dell, they have to refund money to other all-Intel shops... perhaps Apple or other players that agreed to go all Intel to get price breaks.

If Intel gives Dell a 250m rebate, then they are actually charging below the price, and would have to match it elsewhere. However, by hiding the rebate, they can keep charging Dell a book value and collecting the premium elsewhere.

When big players negotiate big contracts, they often put in protections to not be worse off than the competition. I would expect the deal to be illegal because by not disclosing it, they MAY be in material breach to other companies. Further, Intel has signed consent decrees with the Feds over alleged anti-trust violations, and non-disclosed payments to keep competition out may violate those agreements.

This isn't a local computer shop contracting with a wholesaler, these are two Fortune 50 companies, sometimes they have arrangements covering them.

Also, what if a state government agreed to a deal where Dell was the exclusive provider in exchange for cost-plus accounting. Dell would bill on the reported cost, plus profit margin, and then collect the rebate.

There are a bunch of reasons why this might be illegal because it is potentially defrauding other companies IF their deals are dependent on Intel or Dell's pricing structure.

When big players negotiate big contracts, they often put in protections to not be worse off than the competition. I would expect the deal to be illegal because by not disclosing it, they MAY be in material breach to other companies. Further, Intel has signed consent decrees with the Feds over alleged anti-trust violations, and non-disclosed payments to keep competition out may violate those agreements.

In my experience as an accountant, I have seen several such contracts too.

1) Even if Intel had entered into such contracts,Intel would only be guilty of breach of contract and would be liable for damages. It would still not be an illegal act.

To clarify, I meant illegal as in violating a legal agreement, subject to legal action, not criminal behavior.

4) GAAP does not require rebates to be separately disclosed. It is perfectly correct accounting to account for such rebates as a reduction from purchase cost. In fact, if they didnt do so, they would be overvaluing their inventory, t

An accountant, a Lawyer, and an Engineer are all interviewing for a CEO job. As part of their respective interviews, the Board of Directors asks them what 2 + 2 is.
The Lawyer answers that it generally considered to be 4, but there could be precendants in which that answer may vary.
The Engineer takes out a slide rule, works for a bit, and answers that it is 4.000000000000000000000000000000000000000
The Accountant looks at the Board and asks, "What would you like it to be?"

As un-/. as it seems, I actually read the article, and I don't get it.

OK, this is probably illegal. But defrauding the shareholders by artificially increasing profits? Huh? If a company finds a way to make an extra billion and change each year, don't shareholders usually consider that a good thing?

It is the same thing as if Dell was selling cocaine, and claiming that the proceeds from that were due to their super-fine computer business. People would be investing in them because they had such great metrics in the sustainable, legal business of selling computers. This is apparently not the case.

It also means that they will likely perform poorly compared to previous quarters. Stock value is about looking forward, not back - the price rises on what people think will happen next. In other words, speculation. Lots of folks will lose money because of these secret, and likely, illegal dealings. Hence the lawsuit.

Moreover, this behavior may open Dell to substantial unrelated lawsuits - which means that the folks in charge of Dell were neglecting their fiduciary responsibility to shareholders. Again, a perfectly valid reason for shareholders to sue.

Actually, the deal was almost certainly illegal. It is just a matter of who is guilty, and what the actual transgression was. Take your pick:* Dell is nailed for cooking the books - it appeared to everyone that they were doing great SELLING COMPUTERS. It isn't just about doing well.

* Intel and Dell are nailed on uncompetitive practices.

* Intel is nailed for monopolistic practices, with Dell as an accomplice. Might be the same thing as the previous bullet, IANAL.

You point it out yourself. Artificially. Now that Dell is shipping AMD processors they are probably not getting the rebate from Intel anymore. Their profits are going to take a big hit for reasons which were not disclosed to investors. Had Dell been putting something in their FTC filings saying "$1 billion dollars of revenue are dependent upon exclusive marketing deals with Intel which we may not be able to maintain in the face of increasing

I've seen the Vista ads in which Microsoft compares Vista to the fall of the Berlin wall and the man-moon shot (ooookay) and in this end instead of an Intel logo, we get an AMD logo. Kinda interesting. But off-topic...

I found it sort of funny that Dell finally started offering computers with AMD chips around the time that Intel finally caught back up to AMD performance-wise. There were a good 2-3 years (at least) when AMD was the clear leader in terms of both price and performance when you couldn't get AMD from Dell. Now that Intel is back on top (at least in terms of performance), Dell has finally gotten around to offering AMD.I'm not at all surprised to hear about the lawsuit - it seemed to me that the only reason De

From TFA "The lawsuit accuses Dell of artificially inflating profits "by secretly receiving approximately $250 million a quarter..."1) Well, if the USD250 mn received was accounted for (thus "inflating profits") how can it be secret? If the rebate was illegally pocketed by execs, that would be "under the table".

2) Last time I checked, it was not "illegal" to offer quantity discounts/rebates to large customers. Hell, according to the law firm's logic, buying at CostCo is illegal because they offer quantity b

Well, if the USD250 mn received was accounted for (thus "inflating profits") how can it be secret?

Because it wasn't tied in to the product it applied to (as reduced COGS, as rebates should be applied). Instead, it was classed as revenue, which then overstates both their gross income and their COGS. While the net is the same, key ratios are thrown off, thus changing the valuation analysts give to the stock.

Last time I checked, it was not "illegal" to offer quantity discounts/rebates to large customers.

I certainly agree with your point that if the "kickbacks" were classed as revenue, it would amount to incorrect accounting.This is a very basic and common inventory valuation issue. If inventory was actually valued gross of rebates, the entire accounting team along with the auditors ought to be fired.

However, there are certainly some practical problems. Problems arise when the rebate is based on full-year purchases and during the early quarters there is no way to know with any certainty whether the reba

I'd like to see if this digs up anything along the lines of Microsoft marketing kickbacks and how it tied Windows to the OEM like thumb and index fingers on a child playing with superglue( or white on rice, stink on shit, etc ).I've heard that over 20% of Dells profits come directly from marketing Windows. you know, 'we recommend Microsoft Windows XP' on ever page on it's website, the 12 MS windows stickers on keyboards, mice, monitor, case with ever new Dell PC. Oh, and don't forget the 'there are too many

The lawsuit accuses Dell of artificially inflating profits "by secretly receiving approximately $250 million a quarter in likely illegal rebate kickbacks payments" from Intel in return for an exclusive deal to purchase Intel's microprocessors, class-action lawyer William Lerach told Reuters.

There's some smoke here and probably a fire below it given how corrupt the decision making process is in a corporation. But it's not really actionable by a money trawling lawyer. The SEC certainly doesn't care. Otherw

But it's not really actionable by a money trawling lawyer. The SEC certainly doesn't care.

Would you care to elaborate on that? This suit may well be the first that the SEC has heard of the alleged deception. Furthermore, it is being actioned on. I suppose it follows that plantiff's lawyers aren't money trawling...

Bingo! This is how the lawyer gets his and the only reason we would ever hear anything about it. I don't see shareholders benefitting in any way shape or form.

Well, it is a shareholder lawsuit leveled against alleged corporate malfeasance. The shareholders didn't give up their shares when they chose to be represented by a legal firm - and they will certainly benefit if they win.

I don't know of any shareholder lawsuit that ever benefited the shareholders in general. Maybe one or two specifically made out, but usually the stock price falls and everyone loses money. Except the lawyer that started the whole mess.This is unlikely to be anything the SEC takes an interest in, or anyone else for that matter. The specifics are almost certainly legal even if the outward appearance is shakey. Dell and Intel are unlikely to risk as much as 20% of their annual revenue on some scheme the law

A quick look shows Intel's profit as being $5 billion a year, and Dell's as being $3 billion. A payment of $1 billion a year from Intel to Dell is a pretty significant financial event for both companies...

The plaintiffs also contend that the company and its executives participated in a "widespread, long-running scheme to defraud" shareholders and inflate Dell's stock price, said Lerach, head of law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP in San Diego.

This is the firm that's made a tidy living sueing the hell out of public companies whose stock drops suddenly. Guess the stock market is doing so well that they've decided to sue for prices going in the upward direction as well. Usually the target settles out of court because winning the legal battle would cost them more. A few years back they sued a company whose stock I own. In that case the company fought them off, but it cost me and the other stockholders (in whose names Lerach was sueing, thank you so much) several million. May Lerach and his ilk rot in hell.

A few years back they sued a company whose stock I own. In that case the company fought them off, but it cost me and the other stockholders (in whose names Lerach was sueing, thank you so much) several million. May Lerach and his ilk rot in hell.

Can you sue them for including you in a lawsuit you did not wish to participate in, and the losses you suffered because of their reckless behavior?

1: The main culprit being given these days by many pundunts for Dell's current woes was their failure to switch to AMD processors earlier to remain competitive. CEO Rollins (now departed) said their customers weren't demanding it. Well I'm a customer, and I was demanding it over a year ago, in an actual letter printed on paper and USPS mailed directly to his office. IMHO Rollins couldn't listen, couldn't read, or both!

2: Dell is alleged to have received $1 Gigabucks kickback/payoff from Intel last year

Okay, not really. The presence or non-presence of any CPU vendor's technology inside of any device is generally a net factor of the money which must change hands to put it there (think of it more as a rebate and less as a kickback, and perhaps it won't sound so dirty). Likely the same reason why the original Xbox, which originally was going to have an AMD CPU, ended up with an Intel CPU.

Anyone who thinks that AMD got in and Intel got back in due simply just to processor technology or speed is kidding the

The lawsuit accuses Dell of artificially inflating profits "by secretly receiving approximately $250 million a quarter in likely illegal rebate kickbacks payments" from Intel in return for an exclusive deal to purchase Intel's microprocessors, class-action lawyer William Lerach told Reuters.Intel denied the accusations and said that some of the claims appear to "rehash" similar complaints against the chip maker by smaller rival Advanced Micro Devices Inc.. A Dell spokesman would not comment on the lawsuit.

That requires ever bigger CPU's and then pays off Dell to purchase the CPU's. Seems like reasonable free market capitalism to me. I can't imagine why the Libertarians here would object to that. They're just competing differently.

"But whatever the case, it shows that Intel doesn't trust their product enough to expose it to the free market."

*looks at home built Celeron machine*

*looks at old home built PIII*

*looks at dual pentium pro server*

Oh noes! It cannot be! Would these 3 machines spanning 10 years possibly be.... Intel processors bought from the "free market"? They must be Cyrix M2-300s or Motorola 68000s with Intel stickers on them, because Intel would surely never release their sub standard rubbish onto the open market.

No. AA had a stunning record of being involved in every major accounting scandal for something like 10 years. Sunbeam? Check. Xerox? Check. Tyco? Check. Worldcom? Check. Enron? Check. And *then* they shredded the Enron documents...

You know things are bad when former spin offs (what would become Accenture) pay 1.2B to AA to NOT use the Anderson name:)

Intel was a monopolist loooong before AMD was in the picture. We're talking 8086 on up.

Umm, no. AMD were around from the time IBM decided to buy the 8088 from Intel. They were created and given a license to Intel's design specifically because IBM would not buy a CPU without a second source.

What possible reason could these companies have for holding backon recompiling versions for Linux ?

OT, but I'll bite.

I guess you've never tried to port a piece of Windows-specific code to Linux or some other open platform.It is simply impossible if it is written to the Windows API and the message system. A complete rewrite is easier. Yes, you can pillage the original code, but the UI code is usually much bigger than the part that does the actual processing.